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Thursday, February 9, 2017

MANAGEMENT SPECIAL .....The dark side of transparency

Executives
need to get smarter about when to open up and when to withhold information so
they can enjoy the benefits of organizational transparency while mitigating its
unintended consequences.

Transparency in the business world—think of buyers and sellers rating
each other on eBay, Airbnb, and Uber—is generally considered a good thing. It
accelerates information gathering, helps people coordinate their efforts, and
makes those in positions of authority accountable to others.

What about transparency within organizations?
Again, many emphasize the benefits of sharing information freely, as a way of
empowering frontline employees and improving the quality and speed of decision
making. For example, transparency is one of the key principles in the
increasingly popular Scrum methodology for
project management: “In my companies, every salary,
every financial, every expenditure is available to everyone,” says Jeff
Sutherland, its inventor. Compared to knowledge hoarding and secretive
behavior, it is easy to agree that greater information sharing is a good thing.

But there is also a “dark side” to
transparency. Excessive sharing of information creates problems of information
overload and can legitimize endless debate and second-guessing of senior
executive decisions. High levels of visibility can reduce creativity as people
fear the watchful eye of their superiors. And the open sharing of information
on individual performance and pay levels, often invoked as a way of promoting
trust and collective responsibility, can backfire.

There is a fascinating paradox in all
this. It’s possible in a digital age to track activities in real time and to
share information widely at almost zero cost (in theory, at least, improving
decision making). But, in many cases, the innovations that have brought this
about have reduced effectiveness, thanks to an emerging
“accountability gap” where information is in the hands of people who may not
use it wisely.

Executives may therefore need to become
smarter about when to open up and when to withhold information. This article
looks at three main areas where too much transparency creates problems and
offers some guidance on how to get the balance right.

Transparency
in day-to-day business activities

Thanks to technology, companies can now
monitor business activities in minute detail, from verbatim logs in a call
center to real-time GPS tracking of component supplies. Such information isn’t
necessarily restricted to top executives: some firms now make video recordings
of their meetings so everyone can see what went on; others have opened up their
strategy-making process by allowing employees across the firm to read and
review a wide range of planning documents.

The argument for
transparency lies in the wisdom-of-crowds effect: by
broadening the number of people involved, we will make smarter decisions and we
will increase buy-in. But there are also problems with this approach. One is
lack of speed: “It takes us so much longer to make decisions because so many
people are involved,” admits Jim Whitehurst, CEO
of software company Red Hat, which has pioneered a highly inclusive approach to
strategy making.

The other, and bigger, concern is that
people weigh in without relevant knowledge, or without any responsibility to
see things through. One university we know well provided faculty with detailed
information about the student demand for elective courses, resulting in a
number of proposals to cut certain courses and grow others. The proposals were
well intentioned, but were later rejected because the faculty did not know the
trade-offs that had to be managed to introduce new classes. Both faculty and
senior management were frustrated.

Some companies have sought to overcome
this accountability gap. For example, the Amazon subsidiary Zappos recently
experimented with an ambitious form of self-management called holacracy, in
which work is done in self-governing teams without any formal management roles,
and employees have a “duty of transparency.”1But
implementing this new transparent way of working has not worked for everyone,
with 14 percent of workers choosing to leave since it was introduced. One study
noted that it “has been confusing and time-consuming, especially at first,
sometimes requiring five extra hours of meetings a week as workers unshackled
from their former bosses organize themselves into ‘circles.’” Another company,
Shift (founded by former Zappos manager Zach Ware), abandoned holacracy after
less than a year because it led to too many meetings and vague decision-making
authority.

Such cases reveal an important truth: many
people do not want to know the full details of how their firm is doing, nor do
they want to be held fully responsible for its outputs. Instead, they want to
know enough to do their job well and they want to have the right to know more,
but for the most part they are happy for someone else to process and manage
that information on their behalf.

So how do you get the balance right? The
first rule of thumb is to strive for a match between transparency and
responsibility. If client service is everyone’s responsibility, then data on
service levels should be available to all; but if decisions about which product
lines to invest in and which ones to cut are the CEO’s responsibility, he or
she should have privileged access to the information needed to make those
decisions. If employees can access this type of privileged information anyway,
it is useful to create a team or task force with responsibility for sifting
through and channeling the views of employees to the ultimate decision makers.
A works council in Germany or an employee committee like the one at retailer
John Lewis can give employees a voice without the entire decision-making
process grinding to a halt.

Transparency
in employee efforts and rewards

Employee earnings is a
second and highly controversial dimension of transparency. About one-third of
US companies have “no disclosure” contracts that specifically forbid employees
from discussing their pay with coworkers.3In most others, pay is
implicitly a private matter between boss and employee. But in recent years a
number of firms have experimented with radical pay transparency,
even in large firms such as Whole Foods Market. Reasons for this shift include
a desire to treat employees as adults, increase trust, and spur competition.

But sharing pay information can
backfire—badly. Consider the example of a Canadian engineering firm. Each year,
just before Christmas, the founder and CEO of the 30-year-old company used to
look over each employee’s contributions for the year, and then award each
person a bonus based on his personal beliefs about the value of those
contributions. Sometimes the bonuses would be large—say $30,000—and other times
the bonuses would be small ($5,000 or nothing at all). There was no formula,
only the judgment call of the founder.

As the organization grew, however, the CEO
requested that company leaders develop a rational and transparent process for
determining allocation of bonuses. The leaders worked for a year to create a
fair bonus system based on pre-established key performance indicators, and
launched it through town halls and workshops so that everyone was clear how
their bonus would be calculated. A year later, after the bonuses had been
calculated and distributed according to the new system, employees acknowledged
the increased transparency, but their perceptions of the fairness of the
bonuses were significantly worse, and they trusted the employer.
Even those who had received as much or more than the previous year were
significantly less satisfied with the fairness of the more
transparent system, and trusted the employer less.

What went wrong? Interviews we conducted
with employees suggested two unintended side effects of the new process. First,
transparency invited a critical and transactional evaluation, rather than the
bonus being seen as an unexpected gift. Second, transparency highlighted those
who received larger bonuses, inviting envy on the part of those who fared less
well.

The company leaders were genuinely
surprised and have had to train managers to have tough monthly conversations,
which can be facilitated through better data and clearer expectations about
performance criteria.

This case illustrates the psychological
phenomenon of social comparison, whereby people have a need to compare themselves
to others. In the workplace, we are driven to compare the equity of our
contributions (inputs) and rewards (outcomes) relative to others. Perceiving
our ratio of rewards to contributions as worse than other people’s creates
mental dissonance that can spiral into envy, distraction, stealing, withdrawing
effort, or quitting.

Greater transparency was supposed to
increase perceptions of equity at the Canadian engineering firm, but its
emphasis on outcomes (rather than inputs and outcomes) had the
opposite effect. Employees focused on “gaming” the mechanics of the system
rather than creating real value and thinking about the collective good. As a
result, the senior executives had to put in a lot of additional work, meeting
with employees to explain more clearly how the new scheme actually worked. In
hindsight, one of them noted, “it would have been useful to announce and run
the new bonus system as a ‘phantom’ for the first year, telling employees what
they would have earned under the new system, and then allowing them voice about
the pain points of the new system.”

In sum, even though many firms are
experimenting with pay transparency, we believe they should be cautious and
only do it when they can clearly connect employees’ inputs to the outcomes they
achieved.

Transparency
in creative work

The third area where transparency can
backfire is in creative work.

In many circumstances,
such as working on an oil rig where safety comes first, making actions visible
to others is a good thing. But in other circumstances it can have its
downsides. Creative work, in particular, with its nonlinear detours and dead
ends, does not benefit from high levels of transparency. Indeed, the close
monitoring of the process of developing a creative product is detrimental because
the creative person may self-censor some of his or her better ideas, for fear
that they will be misunderstood or criticized. For example, one study found that
workers in a mobile-phone factory actually did their most productive and
creative work when they were not being observed, suggesting that performance
improvements can sometimes be achieved by creating “zones of privacy.”

Consider the case of Eulogy, a
communications agency based in London, where CEO Adrian Brady has sought to
increase transparency in his team’s creative work by bringing clients into
early-stage brainstorming sessions. While this approach has ultimately proven
useful, Euology’s experience also shows it can give rise to negative side
effects.

One problem is that clients can reject
early-stage ideas before there is a chance to develop them fully. “A client’s
immediate negative reaction to a potentially great idea can end a conversation
before it takes flight, making it hard to do anything big or new,” explained
Brady.

Another issue with full transparency is
that clients don’t fully understand the process they are observing. “Sometimes
a winning creative idea that is perfectly suited for a client’s brief is
something that pops into our heads within minutes,” said Brady, whereas in
other cases it can take many weeks. When clients have a “time-and-materials
mind-set” they’re likely to focus on how long it took to get the idea, rather
than how much value it will generate.

Eulogy’s original and highly successful
campaign for the beer company Grolsch, for example, was based on a single
brainstorming session. “Logically, clients know they pay us for our expertise,
experience, and creativity in the right idea,” Brady observed. “But
emotionally, it can be hard for people to pay us if they know it took 15
minutes to generate.”

A similar sort of challenge faces
companies that make video recordings of meetings and then post them online for
all employees to review. One company tested this new approach for a year, but
with mixed results. While seen as a big step forward in accountability, some
executives were seen to talk freely in ways that reflected negatively on, and
offended, employees. Executives subsequently became more cautious in their
meetings, self-censoring their comments, and taking all the important
conversations offline.

To overcome these issues executives should
identify the truly creative activities in their firm. Which elements of work
proceed on a “one step back, two steps forward” basis, and which take place
according to a predictable linear sequence of steps? They can then build
“windows” into the process through which individuals not involved (either
outsiders or interested employees from other parts of the organization) can
review progress and take stock. Typically those individuals will be happy if
they know in advance where the windows are.

The stronger the level of trust between
those doing the creative work and those overseeing it, the larger the windows
can become.

We are getting used to transparency in our lives. We
allow companies to know where we are physically and what we are thinking about
and searching for. There are some 1.18 billion active users on Facebook every
day, many of whom are updating their information for all to see. But
transparency can also cause pain without much gain. Smart leaders need to know
when to share and when to keep things back. They should also know when to get
immersed in the details of a project or activity and when to turn a blind eye.
Transparency is vital, but it has a dark side, and it takes real skill to get
the balance right.